Question

Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 5,200 1,800 Price per share $ 43 $ 18 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,100. Firm T can be acquired for $20 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's shares. Are the shareholders of Firm T better off with the cash offer or the stock offer? Share offer is better Cash offer is better At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Exchange ratio _ to 1

Answer 1

	No of Shares Outstanding	Price per share	Total
Firm B	5200	43	223600
Firm T	1800	18	32400
Synergy Value			9100
Total value without minusing cash payout if any			265100
Options
Payout received by shareholders of Firm T if cash opted	36000
(20*1800)
Payout received by shareholders of Firm T if shares opted (Value)
No of shares received = 1800/2= 900 shares.
Total shares of the company shall be 5200 + 900 = 6100.
Thus value of the payout is $265100*900/6100	39113.11475
As we see that value of payout is higher when opted for shares, T shareholders should opt for this option.

___________________________________________________________________

At indifference point,

Let x shares be offered for every 1 share in T.

Then no of shares given= 1800x.

Total no of shares in B post merger = 5200 + 1800x.

We are saying that the value that the new share payout will give will be same as cash payout

Or,

1800x/ (5200+1800x)*265100 = 36000

Or,

(5200+1800x)/1800x = 265100/36000

Or,

5200 + 1800x = 132500x.

or

x = 0.45395 Thus at the indifference point, the ratio of shares shall be 0.45395:1 If more shares are offered, the share payout is beneficial and if lesser shares are offered that the cash payout is beneficial to the shareholders of T.